Gold price jumps, dollar sinks ahead of special Fed meeting

The dollar was being punished on Monday, helping to lift gold to a more than three-week high amid swirling speculation about the possible outcome of a special gathering of the US Federal Reserve and chair Janet Yellen's meeting with the President Barack Obama.

Traders in gold futures in New York pushed gold for delivery in June, the most active contract, to above $1,260 an ounce in morning dealings before settling back to $1,258 an ounce, up 1.2% or $15 from Friday's close. Gold hit a 13-month high of $1,274 an ounce March 10 and is up 18.7% in 2016.

The US dollar index fell to below 94 against a basket of the world's major currencies on Monday and the greenback is now trading 5.4% below levels this time last year. Dollar weakness was the result of lowered rate hike expectations with predictions of a second rate hike in December falling to a less than 50% chance.

Commodities priced in US dollar usually have an inverse relationship to the world's reserve currency, particularly gold. The US dollar index's record high of 164.72 reached in February 1985 coincided with the bottom in the price of gold of $284.25 an ounce during that same month.

Physical demand and supply dynamics should also play in favour of higher gold prices as global mine output is expected to plateau in 2016, after seven years of consecutive growth

Large futures speculators or "managed money" investors such as hedge funds dramatically raised bearish bets on gold during the final months of 2015 pushing the overall market into an unprecedented net short position – bets that gold could be bought back at a lower price in the future.

This year however hedge funds have been big-time buyers pushing overall positioning firmly back in the black.

According to the CFTC's weekly Commitment of Traders data up to April 5 released on Friday speculators once again added to long positions – bets that prices will rise – to reach to 19.5 million ounces or 552 tonnes, the highest level since August 2012.

Speculators added to short positions last week, which saw net longs positions shrink slightly but overall managed money position has swung more than 500 tonnes since December's record net short.

The investment bank predicts a pullback in gold prices at the beginning of 2018 as real interest rates turn upwards. Long term the Swiss bank sees gold at around $1,200, saying "at this level, the demand and supply equation will be relatively balanced."

Independent research company Capital Economics also predicts that gold’s rally this year is far from being over.

"In particular, we expect building inflationary pressures in the US to keep real interest rates low, boosting the attractiveness of gold as a store of value. What’s more, physical demand and supply dynamics should also play in favour of higher gold prices as global mine output is expected to plateau in 2016, after seven years of consecutive growth, and demand from central banks and key consumers should remain strong"

Capital Economics sees gold at $1,350 by the end of the year with a rising trend in 2017.